How Do Treasury Dealers Manage Their Positions? - FEDERAL RESERVE BANK of NEW YORK

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How Do Treasury Dealers Manage Their Positions?

August 2007 Number 299
Revised August 2022

JEL classification: G12, G20, G24

Authors: Michael J. Fleming, Giang Nguyen, and Joshua V. Rosenberg

Using thirty-one years of data (1990–2020) on U.S. Treasury dealer positions, we document a significant role for dealers in the intertemporal intermediation of new Treasury security supply. Dealers regularly take into inventory a large share of Treasury issuance so that dealer positions significantly increase during auction weeks. These inventory increases are only partially offset in adjacent weeks and are not significantly hedged with futures. Dealers seem to be compensated for the risk associated with these inventory changes by means of price appreciation in the subsequent week. In the period since the 2007– 09 crisis, dealers lay off inventory faster and receive decreased compensation for inventory risk exposure taken on at auctions. These changes occur amid increased inventory holding costs attributable to post-crisis regulatory changes and increased participation of nondealers (investment funds) in the primary market.

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